We all know that as part of the Bankruptcy Amendment Act, debtors are audited from time to time to make sure that they are providing accurate information to the court (see: Random Audits of Consumer Debtors ).
Most people aren’t aware that Chapter 7 panel trustees are audited as well, but for different reasons.
There Are About 1,100 Chapter 7 Trustees Across the Country
In our district, which is the Eastern District of New York, there are 20 Chapter 7 trustees. That breaks down into nine who receive cases in the Central Islip Bankruptcy Court (see: Long Island Chapter 7 Bankruptcy Trustees ) and eleven who receive cases in the Brooklyn Bankruptcy Court (see: Brooklyn Chapter 7 Bankruptcy Trustees ).
How Chapter 7 Panel Trustees Are Audited
The Executive Office forthe United States Trustee engages in full audits, field exams, trustee interim reports and performance reviews as part of its program to measure a trustee’s compliance with his or her fiduciary duties and other obligations under the U.S. Trustee program.
Chapter 7 panel trustees are fully audited at least once every eight years by an independent Certified Public Accountant.
Every four years, a staff person from the U.S. Trustee’s office conducts a field exam.
All trustees must submit regularly to a trustee interim report.
In addition, the Office of the U.S. Trustee evaluates each panel trustee every two years.
What Are the Most Common Findings in Audits of Chapter 7 Trustees?
The most common finding based on audits is that the trustee was not careful enough in reporting information about assets on a particular form that the trustee is required to file.
Findings that can lead to an “inadequate” opinion include not timely investigating or liquidating assets, failing to supervise support staff, and co-mingling bankruptcy estate funds with non-estate funds.
What Happens if the Chapter 7 Trustee is “Inadequate”?
The U.S. Trustee has determined that some findings are so important that if an auditor uncovers them, the trustee will be given an “inadequate” audit opinion.
This usually happens when the auditor determines that the Chapter 7 trustee accounting and cash management practices are insufficient for safeguarding any funds the trustee is holding on behalf of a bankruptcy estate.
If a Trustee receives an “inadequate” opinion, the trustee gets suspended from the active rotation of receiving new cases.